The Reserve Bank of India’s latest policy statement has unequivocally acknowledged that price stability must remain the primary focus of monetary policy now when, as Governor Shaktikanta Das admitted, “the CPI price momentum remains high”. Elucidating the rationale behind the Monetary Policy Committee’s decision to raise the benchmark repo rate by 35 basis points to 6.25%, he underlined that the ‘battle against inflation was not over’ regardless of a moderation in its pace. Retail inflation remains above the 6% upper tolerance mark and is projected to surpass and then ease just below that level in the last two quarters of this fiscal year. The MPC retained its full-year CPI inflation projection at 6.7%, but bumped up the forecasts for Q3 and Q4 by 10 basis points each to 6.6% and 5.9%, respectively, acknowledging that inflation expectations are now well adrift of the MPC’s mandated 4% target. Worse, core inflation, or price gains that strip out volatile food and fuel costs, has also stayed stubbornly stuck around the 6% level with price pressures across most of the constituent sub-groups. This is a far from reassuring outlook for price stability, especially when one considers that the resurgent demand across services is likely to trigger price increases when firms begin to pass on higher input costs.
The RBI’s policy panel was, however, far from unanimous in its decisions. While one of the six members voted against raising the policy rate, presumably so as to not dampen the as yet tentative economic recovery, two members dissented over the policy stance remaining ‘focused on the withdrawal of accommodation’. The majority was, however, emphatic that “further calibrated monetary policy action is warranted to keep inflation expectations anchored, break core inflation persistence and contain second round effects”. Anchoring price stability would ultimately serve to ‘strengthen medium-term growth prospects’, they reasoned. After all, as the RBI’s latest Monetary Policy Report observed, ‘second-round effects could keep inflation at elevated levels even beyond 8 quarters’ and it was therefore imperative to make policy interventions to anchor inflation expectations. Governor Das also pointed out that even after the latest increase, the benchmark interest rate still remains very much ‘accommodative’ when adjusted for inflation. The RBI’s own November round of the consumer confidence survey shows that a significant majority of respondents perceive and expect one year ahead a deterioration in price levels, making this the single biggest drag on consumer sentiment. Ultimately, savers and consumers need to regain confidence that prices will remain stable over a medium term to resume saving and buying to help entrench a durable economic recovery.